What does China's Wen mean when he says break bank monopoly?

REUTERS - When Chinese Premier Wen Jiabao talks about busting a bank monopoly, he may be thinking of modest financial reforms, not a dismantling of the Big Four state-owned banks.

His comments on Tuesday were blunt: the big banks reap profits "far too easily" and operate like a monopoly that needs to be broken in order to speed the flow of money to loan-hungry smaller businesses.

Reuters contacted five of China's largest banks to see how Wen's remarks were received. There was little concern that a major policy shift was imminent, especially when the Communist Party is only months away from a once-a-decade power handover, which includes replacing Wen.

"Wen has one year left (in his term)," said a Chinese state banker who asked not to be identified because of the sensitivity of the topic. "This is a task for the next generation of leaders. It cannot be accomplished within one year."

The Big Four banks, Industrial and Commercial Bank of China <601398.SS>, Bank of China <601988.SS>, Agricultural Bank of China <601288.SS> and China Construction Bank <601939.SS>, account for about 40 percent of China's total loans.

They have come under criticism for earning fat profits while small businesses scramble for financing.

Last year, the top four banks earned net profits totalling $99 billion, more than double at their U.S. equivalent - Citibank , J.P. Morgan Chase , Bank of America Merrill Lynch and Wells Fargo .

The large banks tend to direct most of their lending toward fellow state-owned enterprises, but China increasingly relies on smaller private firms for job creation and economic growth.

The big banks wield formidable political power. Top executives are appointed by the Communist Party's Organisation Department and hold a rank equivalent to a cabinet vice-minister.

That means any aggressive form of monopoly busting, akin to the U.S. government's dismantling of the "Ma Bell" telephone company in the 1980s, would require widespread political support and that does not appear to be in place.

Judging from Wen's past remarks on financial reform, his answer to unblocking lending likely involves more modest measures such as encouraging the development of local banks and deepening credit markets to give borrowers choices other than traditional bank loans.

That could open up the flow of lending to smaller businesses without posing a serious threat to the Big Four.

Wen has long been known as a reform-minded leader and has been outspoken on the need to modernise China's financial system to help sustain economic growth. His views are not always shared by the rest of the leadership in Beijing, and it was unclear whether Tuesday's comments reflected a broader consensus.

Neither Xinhua, the state-owned news organization, nor the People's Daily, the main Communist Party newspaper, reported Wen's latest remarks, which could be an indication that they do not reflect the rest of the leadership's thinking.

This wasn't the first time Wen has spoken of loosening the big banks' grip on lending. On January 30, he said the government needed to "break monopolies" that block private capital from coming into the financial sector.

He also promoted a pilot programme in Wenzhou, a city that has been a hotbed of entrepreneurism but also risky lending schemes, to encourage private investment in local banks and set up loan companies as a way to expand borrowing options.

Wen may feel emboldened to push his reform agenda harder after last month's ouster of rising star Bo Xilai who had made no secret of his ambitions to enter the inner circle of the ruling Communist Party.

His downfall followed oblique criticism by Wen which has raised questions over whether the more traditional, state dominated economic model that Bo promoted would be able to survive him.

"Market economists have been talking about reforms for many years and Premier Wen will push ahead for it this year," said Jian Chang, a China economist with Barclays Capital in Hong Kong. "The progress will be steady and gradual, and starts with trials... It cannot happen overnight."